Redemptions from EPFR-tracked Equity Funds hit an 11-week high in early September as investors surveyed a sea of troubles, ranging from the complete shut-down of the Nord Stream 1 natural gas pipeline connecting Russia with European markets to the US Federal Reserve’s plan to double the pace of its balance sheet reduction.
Late August found markets and investors chewing on a new nugget of ‘Fed-speak.’ What does “some pain,” which US Federal Reserve Chairman Jerome Powell promised in his speech at the Davos forum, translate into?
Hawkish remarks by US Federal Reserve policymakers going into the final week of August put the brakes on what investors are hoping is the next leg of a bull market. Worried that they may be walking into another 75 basis points hike in US interest rates next month, those investors call a halt to the rebuilding of positions exited during the second quarter.
The present, in mid-August, continued to offer little obvious comfort to investors. Russia’s invasion of Ukraine ground on towards the 200-day mark, drought weighed on transport, agriculture and energy in countries ranging from France to China, the seven-day average for global Covid-19 cases remained above 900,000 and inflation remains elevated in the US, Europe and many emerging markets.
Dead cat bounce or the start of a new bull market? The Dow Jones Industrial Average and the Nasdaq ended the second week of August at levels last seen in early May and late April, respectively, while the yield on the 10-year US Treasury note remained below 2.9%.
EPFR-tracked Bond Funds started August by posting their biggest inflow since mid-4Q21 as investors translated mixed earnings reports and macroeconomic data into an early end to the current tightening cycle in the US.
As expected, the fourth week of July ended with the Federal Reserve hiking US interest rates by another 75 basis points. For a market that feared June’s inflation number – a 40-year high – might justify a 100 basis points hike, the smaller increase was greeted with relief and a modest jump in risk appetite.
The third week of July was a tense one for investors with a European focus, who waited for the answers to a number of thorny questions. Would Russian gas start flowing again through the Nord Stream 1 pipeline? Would Italian Prime Minister Mario Draghi retain the support of his coalition government? Would the European Central Bank act on previous guidance and raise interest rates for the first time in 11 years? When will one of the worst heatwaves ever experienced by Europe break?
Given the raft of unsettling news and data thrown at them during the second week of July, investors showed considerable fortitude.
Flows during the first week of the third quarter favored liquidity, with EPFR-tracked Money Market Funds recording their biggest inflow year-to-date. But there were a few signs that investors are willing to test what have been stormy waters for much of the past four months.